The emissions trading system is part of the government's plan to put the oil and gas-rich Central Asian economy on a more sustainable path, but the private sector argues it will be bad for the economy

BERLIN (Thomson Reuters Foundation) - While Kazakhstan’s environment minister, Nurlan Kapparov, was promoting his country’s efforts to halt global warming at November’s U.N. climate talks in Warsaw, back home big business was piling pressure on the government to put a key green initiative on hold.

On Nov. 20, the Kazakh national business chamber called on the government to suspend its emissions trading system (ETS) - the first in Asia – for the duration of the country’s industrial development programme, which runs through 2014.

The ETS launch in January 2013 was part of a strategy to put the oil and gas-rich Central Asian economy on a more sustainable path - a pet project of President Nursultan Nazarbayev.

In May, Nazarbayev adopted a plan to transition the country to a green economy. It aims for the share of renewable energy sources in electricity generation to be increased from less than 1 percent to 50 percent by 2050.

In a 2010 submission to the U.N. climate change secretariat, Kazakhstan pledged on a voluntary basis to reduce its greenhouse gas emissions 15 percent below 1992 levels by 2020. Yet heavy industry in the country continues to run at full speed.

Since 2006, Kazakhstan’s emissions have climbed 40 percent, according to an annual climate performance index released by Germanwatch in November. This year, Kazakhstan has generated over 270 million tonnes of greenhouse gas emissions, and is now one of the world’s biggest emitters per unit of GDP, according to the country’s environment ministry.

During the pilot phase of its emissions trading system, the government set an emissions cap for 178 companies in the energy, mining, chemical and transport sectors, responsible for 80 percent of the country’s total carbon dioxide emissions. The European Union’s ETS in comparison covers only about 50 percent of its CO2 emissions.

So far, Kazakh companies have been required to report on their emissions but have risked no fines for non-compliance with the allocated allowances.

But the second phase of the scheme for 2014-2015 aimed to change that by introducing fines for companies that did not buy permits to offset emissions above their allocation. As a result, the planned rules ran up against fierce business opposition.

“The new government plan is costly and unwieldy,” while the introduction of non-compliance fines “will affect economic growth, reduce competitiveness and lead to investment decline in the power sector,” the Kazakh business chamber said.

CALL FOR GRADUAL TRANSITION

Valery Li, deputy chairman of Samruk-Energy, one of Kazakhstan’s largest energy holdings, said the main subject of the business disagreement was not the government’s policy, but its methodology.

“They took 2010 as a baseline year, although it is clear that the energy production increased thereafter. Instead, we propose to take a seven-year forecast on energy production as a baseline and consider not only electricity but also heat production,” he said.

Li added that businesses want the environment ministry to incentivise combined heat and power plants by giving them higher emissions allowances, as they are more energy-efficient than pure power or heat plants. About 40 percent of Kazakhstan’s electricity is produced by such cogeneration plants.

Under the original plan for the second ETS phase, companies that failed to meet their emissions quotas would have faced fines of up to $100 per tonne, Li said. “These fines are higher than in the European Union. In this case, you would simply have to sell all energy companies in the country. We propose to transfer to the ETS gradually - not in one year, but say in five years," he said.

Legal expert Vadim Ni, who prepared the by-laws for the ETS in Kazakhstan, said business opposition to the government’s plans are a sign that oil and energy companies are not ready to compromise.

“It is clear that there were informal discussions with the prime minister before. Since they didn’t achieve what they wanted, they went public with their protest,” he said.

It seems that business has had some success with its complaints, forcing the government to back track on certain points.

The ETS will proceed in its “pilot” form in 2014-2015 with the aim of improving the regulatory framework and its measurement, reporting and verification (MRV) system, the head of the state-owned Zhasyl Damu market regulator, Sergey Tsoy, said. No trading of permits is due to take place in 2014.

“The government is in dialogue with the business community. Their expectations will be taken into account, but there are no plans for suspension of the ETS,” Tsoy said.

According to Tsoy, the second phase will cover only 166 companies, as the transport sector has been taken out of the scheme, and it will use average emissions in 2011-2012 as a baseline.

Plans for emissions allocations - which are still pending government approval – foresee allocation of 100 percent of permits in 2014, with allowances being reduced by 1.5 percent from the baseline in 2015. Companies that fail to comply with the ETS cap will have to pay fines of about 40 euros per tonne of carbon dioxide, Tsoy said.

MODEL FOR OTHER COUNTRIES?

The long-term future of the ETS is still under threat, legal expert Ni said. “I do not think it will be completely blocked, but am afraid that more than a second phase will not work. There will probably be some kind of consensus for the time being, whereby an additional transition period will be developed.”

The emission reduction targets are mentioned in the government’s strategic plans for 2020 and 2050, so the ETS should be in place to achieve those, Ni said.

Alexey Kokorin, director of World Wildlife Fund Russia’s climate and energy programme, said the ETS in Kazakhstan might be doomed in the long run as businesses in the country lack motivation to reduce emissions.

According to Kokorin, no significant study on the climate vulnerability of the country exists, whereas the latest World Energy Outlook predicts a significant increase of oil reserves in Kazakhstan in the coming years.

Despite its unclear long-term future, experts say the ETS in Kazakhstan is significant for other former Soviet countries. Leif Ervik, chair of the International Carbon Action Partnership, said a dozen countries share similar decision-making mechanisms and legal systems.

“So once one of these countries goes through the entire process of setting up an ETS, it will be much easier for other countries, for example Ukraine, to do the same,” Ervik said. The Ukrainian government has said it plans to launch a national ETS by 2015.

Komila Nabiyeva is a Berlin-based freelance journalist, reporting on climate change, energy and development issues in Eastern Europe and Central Asia.